Bitcoin Isn’t the Only Cryptocurrency in Town

Currencies designed to fix perceived flaws in Bitcoin could lead to competition that makes the idea of digital “cryptocurrency” stick.

Even if interest in Bitcoin fades, it could still have a lasting legacy as an inspiration to better-designed forms of digital money.

In recent weeks, the digital currency Bitcoin has soared and then dipped in value, along the way attracting more public attention than ever before and speculation as to whether it could become an established and widely accepted way to pay for goods and services.

But Bitcoin isn’t the only cryptocurrency out there. Several others are also surging in popularity and value, and they claim to offer technical improvements that make them better suited to mainstream use.

Some of these competing currencies already represent significant stores of value. The value of a single bitcoin on the most popular exchange was $93.70 at time of publication, and the total value of all bitcoins in circulation just over $1 billion (it was over $2 billion at the market’s high point last week). The largest alternative cryptocurrency, litecoins, were worth $2.31 each and $38 million in total; the next largest, PPCoin, were worth $0.22 each adding up to a total value of $4 million.

Bitcoin is based on mathematical techniques that control the production of new bitcoins, make it possible for a person to verify money sent to them is genuine, rule out counterfeiting, and limit the maximum number that can ever exist (to 21 million) (see “What Bitcoin Is, and Why It Matters”).

The Bitcoin alternatives are inspired by that design, which is published openly, and try to offer improvements.

One of Litecoin’s most significant claimed improvements over Bitcoin is that it allows transactions to be confirmed as legitimate much more quickly, says Charles Lee, who designed the currency, which is now maintained by him and a small group of other enthusiasts.

Bitcoin transactions are verified by the work of software run by other people using the currency, a process that takes on average 10 minutes and can be much longer, an hour in the case of many exchange sites. Lee says that hinders operators of online stores from using the currency. “With Bitcoin, sometimes merchants are forced to accept unconfirmed transactions because confirmations are way too slow,” he says. “Faster confirmations lead to a more useful currency.” Litecoin transactions are confirmed on average every 2.5 minutes, which Litecoin’s developers say is more practical for businesses.

Both Litecoin and the third most-popular cryptocurrency, PPCoin, also generate new coins in a way intended to be more practical than Bitcoin’s design. New bitcoins are created through a process known as mining, in which people run software that competes to solve a computational puzzle. Each time a puzzle is cracked, new coins are awarded and a new challenge is set. In a neat twist, the process of solving a puzzle also confirms the validity of recent transactions made with bitcoins.

However, because more powerful computers are more likely to solve these puzzles, an arms race between bitcoin miners has resulted. Today only those with very powerful, customized machines have a chance of profitably mining bitcoins and miners are still racing to build ever more powerful “mining rigs”.

Litecoin uses a mathematical puzzle that cannot be solved using custom mining chips like those appearing for Bitcoin, which are expected to dramatically shrink the number of people able to mine the currency (see “Custom Chips Could Be the Shovels in a Bitcoin Gold Rush”). Lee says that will make Litecoin less dependent on the activity of a small number of dedicated miners with expensive equipment, allowing a larger pool of miners to compete.

PPCoin’s design is intended to gradually phase out conventional mining altogether. Instead of new PPCoins being handed out to those with the most computational muscle, they are awarded in a kind of lottery in which a miner’s chance of winning is determined by how many PPCoins they have.

That has the effect of decoupling mining and the confirmation of transactions from the cost of electricity and computer power, which King says would be a problem for Bitcoin if it were to become very widely used. “We designed PPCoin with this new concept to achieve long-term energy efficiency,” says Sunny King, one of the founders of PPCoin. “This will not only provide environmental benefit, but also allow us to be more cost-competitive in payment processing.”

George Selgin, an economics professor at University of Georgia who recently published a paper on Bitcoin’s properties, believes that Bitcoin’s design does indeed leave room for competition. “In the long run, its rigid supply is hardly likely to make it a relatively stable—let alone ideal—money, so there’s room for new rivals that can ultimately outstrip it.”

Some Bitcoin devotees worry that alternative currencies could hinder efforts to make the leading cryptocurrency mainstream, but Selgin says that competition could simply increase the odds that any one cryptocurrency succeeds.

“It could, in the long run, give rise to one or several very robust currencies,” he says. “That’s how competition works generally, with winners and losers, but with quality generally improving as the struggle goes on.” The fact that established currencies such as the dollar will exist alongside as a (relatively) safe haven should cushion very severe shocks to individuals as competing currencies duke it out, says Selgin.

The creators of Litecoin and PPCoin don’t talk much about how their efforts may devalue or destabilize Bitcoin but, unsurprisingly, also see a future with multiple cryptocurrencies in widespread use. “Litecoin was designed to be silver to Bitcoin’s gold, it gives people an alternative cryptocurrency in case anything happens to Bitcoin,” says Litecoin’s Lee. “A complete monopoly in the cryptocurrency world is unlikely,” says King, of PPCoin, “I am optimistic that payment processing in cryptocurrency will take over a significant portion of Internet commerce.”